A debit debate: Should debit cards offer same protections as credit cards?

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It looks like a credit card.

It works like a credit card.

But it doesn’t protect you against fraud like a credit card.

The White House, a Congressman and several consumer groups are pushing for legislation that would beef up consumer protection when a debit card is lost or stolen.

“If in fact an issuer is urging people to use debit cards as they use credit cards, the protections should be the same,” says Ken McEldowney, executive director of Consumer Action, a consumer advocacy group based in San Francisco. “There should be no added dangers.”

If your credit card is lost or stolen, federal law limits your liability to $50. Case closed. Things are less clear-cut with debit cards, which yank money from a customer’s checking account at the time of payment.

Act fast for best protection

It’s not so bad if you act fast. Under the Electronic Funds Transfer Act, your liability is capped at $50 if you notify your bank within two days of finding out your debit card is missing. Wait more than two days and you could lose as much as $500.

If you discover an unauthorized charge on a bank statement, you may be on the hook for as much as $500, provided you contact your bank within 60 days.

If you wait longer than 60 days, you’re stuck paying every cent of a thief’s spending spree. You could lose everything in your checking and overdraft accounts.

Liz Hitchcock, communications director at the U.S. Public Interest Research Group, learned about debit card fraud the hard way.

Seven tips for responsible use of debit cards:
  1. If your card is lost or stolen, report the loss immediately to your financial institution.

  2. If you suspect your card is being fraudulently used, report it immediately to your financial institution.

  3. Hold on to your receipts from your debit card transactions. A thief may get your name and debit card number from a receipt and order goods by mail or over the telephone. Your card does not have to be missing in order for it to be misused.

  4. If you have a PIN number, memorize it. Do not keep your PIN number with your card. Also, don’t choose a PIN number that a smart thief could figure out, such as your phone number or birthday.

  5. Never give your PIN number to anyone.

  6. Always know how much money you have available in your account. Don’t forget that your debit card may allow you to access money that you have set aside to cover a check that has not cleared your bank yet.

She was balancing her checkbook in October 1996 and discovered an unauthorized charge for $75 on her account. She called her bank. The female bank employee she spoke with offered little help.

Bank keeps processing transactions

“She basically told me I was stuck with the charge,” Hitchcock says. “She told me you have to cancel the card because the card is out there and the bank will keep processing the transactions.”

Hitchcock canceled the card. She never saw that $75 again. Still, she considers herself lucky.

“I was fortunate,” she says. “I’ve heard from other consumers that have lost a couple of thousand dollars because someone can just keep charging.”

In January 1997, another unauthorized charge popped up on Hitchcock’s bank statement. This charge was for a $150 hotel room in Boston on New Year’s Eve. It took a week of going back and forth with her bank’s anti-fraud unit and the filing of an affidavit before her bank would credit her account.

“Here’s the weird thing. The card never left my hand. Somebody just used the number and expiration date in both circumstances.”

She has no idea how they got her account information. It may have been something as simple as a lost receipt.

“If you leave a receipt somewhere, it has your card’s account number and its expiration date and, as a bonus, a copy of your signature,” Hitchcock says.

Stories like Hitchcock’s had several consumer advocates up in arms in 1997. They were concerned that a thief could empty a customer’s bank account in seconds by simply forging a cardholder’s signature.

Stepped-up liability protection

Visa and MasterCard both stepped up liability protection in summer 1997. MasterCard limits a customer’s liability for losses incurred from a lost or stolen MasterMoney card to $50. Visa debit card customers pay nothing if the card is reported missing within two business days. After that, customer liability is capped at $50. Visa will also give provisional credit — equal to the amount of money in the account at the time the card was reported missing — within five business days.

Banks issuing Visa Check Cards or MasterMoney cards must adhere to these safety guidelines. Individual issuers such as Bank of America also stepped up safety protections.

Bank of America customers are not liable for any charges made with a lost or stolen card. It also has a 24-hour monitoring system in place to spot suspicious account activity. Earlier this year, it launched a program to increase security by allowing customers to put their pictures on their debit cards.

While consumer advocates applaud these voluntary efforts, they still want to see tougher consumer protections under the law.

“I think consumers would feel much more comfortable if the protections were guaranteed by law,” McEldowney says.

“There’s always the danger that an issuer could step back from the voluntary safeguards at any point, which of course they couldn’t do if it was in the law books.”

Legal protections sought

President Clinton agrees. He weighed in his support in May as part of the Clinton-Gore Plan for Financial Privacy and Consumer Protection in the 21st Century. He wants debit card holders to enjoy the same protections under the law as credit card customers.

H.R. 445, a bill by Rep. Tom Barrett, D-Wis., looks to do just that. The bill, introduced earlier this year, would limit a consumer’s liability to $50 if a debit card is lost or stolen. It would also require the words “Check Card” to be displayed in big letters on the front of all debit cards. It would also preclude consumers from being charged fees for insufficient funds caused by the fraudulent use of their cards and require banks to provide debit card fraud victims with provisional credit within five business days equal to the amount of money stolen.

“Protecting consumers against fraud and abuse is essential as we navigate a new age of technology and innovation,” Barrett says. “This legislation takes practical steps to reduce debit card theft loss and fraud.” In February, the bill was referred to the House Subcommittee on Financial Institutions and Consumer Credit, where it has languished since.

In the meantime, consumer experts urge people to study the consumer-protection policies of their banks and keep a close watch on their debit cards.

The National Consumer League, with help from Visa, has published a free information brochure on debit cards. The brochure is available online or you can get a copy mailed to you by calling toll-free 1-800-355-9625.